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Cablegate: Central Bank Governor Commits to Completing Financial


DE RUEHEG #3541/01 3611206
R 271206Z DEC 07





E.O. 12958: N/A
SUBJECT: Central Bank Governor Commits to Completing Financial
Sector MOU Benchmarks

REF: Cairo 3365

Sensitive but Unclassified. Please handle accordingly.

1. (SBU) On December 17, the Ambassador and Econoffs met with
Central Bank of Egypt (CBE) Governor Farouk El Okdah and the two
Deputy Governors, Tarek Amer and Tarek Kandil, to cover a wide
variety of end-of year issues. The Ambassador began by
congratulating the Governor and Deputy Governor Amer for their
reappointments to another four-year term and congratulating Deputy
Governor Kandil for his recent promotion from Sub-Governor to Deputy
Governor. The Governor thanked the U.S. for its continued support
and noted great optimism about the health of the Egyptian economy.
He did note concern that many of lower-income citizens were not
benefiting from Egypt's strong growth, and he indicated that he had
made this point to the Prime Minister and the rest of the cabinet.

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2. (SBU) The Ambassador noted that the U.S. continues to be very
supportive of the Egyptian financial reform effort, but noted
concern over the large pipeline of undisbursed funds related to the
incomplete benchmarks in the Financial Sector MOU. In particular,
the Ambassador inquired about the two outstanding benchmarks under
the CBE's control: 1) the status of the financial sector due
diligence ("audits") of the public sector banks and 2) the prospects
for the finalization of the Master Repurchase Global Agreement.

3. (SBU) Regarding the audits, the Governor and Deputy Governor
Kandil indicated that the work is underway and the results should be
ready for analysis in January or February. The Governor also
recommitted to requesting the international audit firms to initiate
the 2007 audit work immediately after the 2006 work is finished, so
as to be in a position to make a subsequent disbursement request not
long thereafter. The Governor expressed great optimism that there
would be considerable progress shown on NPLs in the 2006 audit
report; this contrasts with the less-optimistic indications we
received from Deputy Governor Kandil when he met with visiting PDAS
Liz Dibble (reftel). (Note: The disbursement which hinges on the
completed audit reports is a pro rata disbursement which is based on
progress towards: reduction of the non-performing loans, an increase
the amount of cash recoveries made on those recovered assets, and
the growth of growth of credit to the private sector. End note.)

4. (SBU) Regarding the Master Global Repurchase Agreement, the
governor's initial reaction was that that the banks are so liquid,
they have no reason to pursue "repos". While recognizing the banks'
high liquidity levels, the Econoffs noted that various experts (IMF,
World Bank and U.S. Treasury debt advisor) have identified this as a
constraint to the development of a healthy financial sector, as the
banks are looking for a CBE signal that these deals are fully
sanctioned. Econoffs agreed that the Repurchase Agreement will not
suddenly create a robust secondary market in government securities,
but noted that the lack of such a Master Agreement was a possible
constraint which, if eliminated, could increase the amount of
trading taking place. The Governor concluded by saying that it
would be no problem to put something in writing and send it to us
early in the new year. The Governor's optimism on this benchmark
was not consistent, however, with Deputy Governor Kandil's recent
assessment that the market was still "2-3 years" from being ready
for this (reftel).

5. (SBU) The Ambassador inquired about the process of the Banque du
Caire privatization. The Governor indicated that the process was on
track and that they expected to evaluate bids in the first half of
the year and the sale would be finalized before July 2008. The
deadline for bid submissions was on the December 17, the same day
the meeting took place and we subsequently learned that an extension
had been granted. The Governor made no mention of this.

6. (U) USAID Director of Policy and Private Sector thanked the CBE
for their recent interest in micro, small and medium enterprises,
and the Governor noted that 2008 would be the year when the CBE
would get much more involved in M/SME issues. USAID also noted that
he was pleased that some of the U.S. graduate schools for banking
have shown interest in Egypt, and urged the CBE to help make these
relationships long-term and sustainable, so as to not have to rely
on donor assistance.

7. (SBU) The Treasury Financial Attache noted the concern expressed
in the recent IMF Article IV and Financial Sector Stability
Assessment which noted both the perception of the lack of
independence of the CBE and the perception of conflict of interest
of some members of its Board. The Governor made the general comment

that there simply are not enough qualified people in Egypt to be
able to staff a 15-person Board without having some perceived
conflict. As a step to remedy this, he noted that none of bankers
on the Board are permitted on the monetary policy committee or to
participate in CBE discussions pertaining to individual banks.
Also, he noted that to isolate himself from perceptions of conflict
of interest, he would seek to step down as the chair of the General
Assembly of the state-owned banks, so that he would not be seen as
both a regulator and owner.


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